The Whitnell Way

Insights For Business Owners, Executives And Affluent Families

Don’t Count On Mom And Dad’s Money

Five Steps To Developing Complete Financial Independence For Young Professionals

Young professionals who grew up in an affluent family often encounter a difficult reality somewhere in their late twenties to early thirties. Building wealth is hard. It takes a lot of discipline and focus. Children of affluent parents often benefitted from their parents’ financial situation. They grew up in nice homes, took expensive family vacations and even attended private schools and universities.

As these professionals enter the work-force and take complete financial responsibility for their lives, the lifestyle to which they became accustomed may no longer be available to them. This can make for some very difficult adjustments.

One of the great challenges of being a child of successful parents is that you always live in the shadow of their success. It can be difficult to carve out your own space in the world, a space that you own completely. Yet for those who accomplish this important goal, the benefits are overwhelmingly positive. These individuals gain a powerful sense of confidence, fulfillment and self-actualization. They also gain the respect of friends, other successful people and their parents.

I have come to believe that whether you grew up rich, poor or somewhere in the middle, you can put yourself on the path to financial success if you are willing to subscribe to a few basic financial principles.

"I enjoy working with young professionals and helping them chart their course toward their financial future. I also enjoy working with my colleagues on the Investment Committee to create solutions for our clients."

The five principles

Here are five principles that I believe will empower most young professionals to achieve their wealth creation goals:

Control spending.

Save early and often.

Start building your financial foundation now.

Stay out of bad debt.

Don’t be afraid to seek out advice.

Let’s look at each of these areas in greater detail.

Control spending

Don’t try to keep up with Joneses. Live within your means. This is the foundation for everything else. If you don’t live within or beneath your means, you will never be in a position to build your own wealth. This is especially difficult for children of affluent families who grew up accustomed to a certain lifestyle.

When a friend gets a new car or a new flat-screen TV for the big game, it can be tempting to follow suit. I recommend that you keep a monthly log of all expenses and track where your money actually goes every month.

Most young professionals build a monthly budget. But budgets are merely plans. Too few people actually track how the money is spent and then compare that against their budget. People who learn to spend and live according to a realistic budget learn self-discipline. This is the foundation for financial success.

Save early and save often

Saving a portion of your monthly income is the second most important financial step you can take to achieve financial independence. There are two types of savings you should build into your monthly budget: a rainy day fund and longer-term funds.

Build a rainy day budget. This should come before all other types of longer-term funds. Your rainy day fund should be at least 3 times your monthly expenses and as much as 6 times monthly expenses. Why do you need this fund and why should it come first?

You never know what life will throw at you. Good luck and bad luck seem to be blind. They show up on everyone’s doorstep and they never call ahead to say they are coming. What if a $7,500 furnace repair pops up out of nowhere and you don’t have the cash on-hand? Would you pay for this with credit cards or a parent loan? Neither of these options are attractive.

What if you lost your job and it took six months to find another job? How would you weather this storm? If you build your rainy day fund first, you’ll not only be prepared for life’s inconveniences, you’ll also put your longer-term investments in the greatest possible position to succeed. Why? Because you reduce the need to tap them in times of crisis, which maintains their long-term integrity.

Start building your financial foundation now

This is the third most important step to achieving complete financial independence. But this is also an area rife with choices and much confusion. Young professionals, even those producing very high incomes, still have limited financial resources. Figuring out how to organize and expend those resources to achieve your goals is critical. Here are three very important areas to make wise decisions:

Utilize the resources at your disposal. Many employers offer 401-k programs and sometimes these include matching contributions which is free money that so many times is left on the table. This can be an excellent resource to begin building long-term wealth.

Mitigate the right risks. Risk mitigation, especially if you have children, is very important. Your employer may offer life insurance, but is it enough? There are numerous ways to mitigate risks, each with their own pros and cons. With so much at stake, it probably makes sense to sit down with a financial advisor to discover the right approach for you.

Fund other accounts. As resources are available, it is wise to fund additional accounts. If your income significantly exceeds your expenses, it makes sense to fund a Roth IRA. If you are a business owner, SEP IRAs are another very good choice. If you have young children, it may make sense to fund a 529 plan. However, there are other ways to pay for college and depending on the age of your children, these plans may or may not make sense for you.

But remember, put first things first. Get counsel to know how to balance children’s college funding versus retirement funds. Many young people do not have the financial resources to fund everything. It sometimes doesn’t make sense to support a college fund if your nest-egg is not fully built. Emergency funds should come first, in my opinion.

Stay out of bad debt

There are all kinds of concepts about good debt versus bad debt. Let’s keep this simple. Mortgage debt is generally good, but credit card debt is virtually always bad. The guiding principle here is the relationship between time and money. If you can make time and interest work for you, then you build wealth. But when interest rates work against you and you don’t invest with a long enough time horizon to achieve goals, wealth building becomes very hard.

The purchase of a primary residence, for young professionals, is a significant financial and personal milestone. If the property appreciates in value over time, combined with your increasing equity from mortgage reduction, you build wealth.

Credit card debt, on the other hand, nearly always reduces net worth. Annual percentage rates are designed to get people to make minimum payments because this yields maximum profits to credit card companies. This is an area where many young professionals put themselves at a disadvantage for wealth building.

Don’t be afraid to seek out advice

It can be intimidating to admit that you don’t know everything. But wealth building is hard and it takes consistent thinking and planning to achieve. No one person knows everything. This is even true in our business, where wealth management is the core of what we do everyday. We still tap into the expertise of team members to create the best possible approach for clients.

Many young professionals make the mistake of believing that their wealth and assets are too small to be talking to a financial advisor right now. Yet this is the critical time when they really need someone who understands their situation and goals. My advice to you is to seek out a professional advisor you can trust and who will take the time to deeply understand your situation and goals.

The lifestyle choices young professionals make between 25 and 35 years of age will often influence whether or not they ever achieve financial independence. Following these five steps will greatly increase the likelihood that you’ll carve out a place in the world that is uniquely your own.

The information contained in this article is provided for informational purposes only. No illustration or content in it should be construed as a substitute for informed professional tax, legal, and/or financial advice.